Indian Stock Markets Poised to Align with Emerging Markets Amid Modi-Xi Meeting
Indian stock markets are poised for a potential upswing, driven by a series of favorable developments. A recent meeting between Prime Minister Narendra Modi and Chinese President Xi Jinping has sparked optimism about strengthening economic ties with China, the world’s second-largest economy. Coupled with recent cuts to the Goods and Services Tax (GST), these factors are generating positive sentiment among investors, suggesting that Indian equities may soon close the performance gap with other emerging markets. Analysts believe these developments could mitigate the impact of US tariffs on Indian exports, particularly in the technology sector.
Positive Outlook from Modi-Xi Meeting
The recent meeting between Modi and Xi in Tianjin on August 31 has been hailed as a significant step towards enhancing bilateral relations. Both leaders expressed a commitment to fostering partnership over competition, discussing key issues such as border disputes, the restoration of air travel, and the enhancement of trade relations. Analysts suggest that this diplomatic thaw could lead to increased investments in India, sharing of industrial expertise, and better access to Chinese clean energy networks.
This diplomatic progress comes at a crucial time for Indian markets, which have lagged behind their global counterparts. The underperformance is attributed to the adverse effects of US tariffs and lackluster corporate earnings. According to Pramod Gubbi, co-founder of Marcellus Investment Managers, improved relations with China could halt the recent decline in investment allocations to India from emerging market portfolios. He believes that the positive economic growth anticipated from this partnership may offset concerns regarding US tariffs.
Supportive Policies Boosting Investor Confidence
The investment landscape in India is further bolstered by supportive policy measures from the Reserve Bank of India (RBI). Governor Sanjay Malhotra recently indicated that the central bank is committed to continuing its easing cycle to stimulate growth, particularly in sectors impacted by tariffs. Since February, the RBI has reduced its benchmark interest rate by 100 basis points, aiming to provide relief to businesses and consumers alike.
Additionally, the Modi government has implemented significant cuts to the Goods and Services Tax (GST) across nearly 400 product categories, affecting around 16% of India’s consumer-price basket. This move has already led to a surge in shares of consumer companies and automobile manufacturers. Anna Wu, a cross-asset strategist at VanEck Associates Corp., noted that the combination of improved China-India relations and tax cuts could serve as a structural tailwind for Indian equities, enhancing their resilience against US tariff pressures.
Trade Disparities and Future Prospects
Despite the positive developments, the trade relationship between India and China remains imbalanced. For the fiscal year ending March 2025, India’s exports to China totaled $14.2 billion, while imports from China reached a staggering $113.5 billion. This disparity raises questions about the sustainability of the recent diplomatic improvements and their tangible benefits for India.
Skepticism persists among some analysts regarding the long-term impact of the Modi-Xi discussions. Kunjal Gala, head of global emerging markets at Federated Hermes Ltd., pointed out that it is still too early to determine which sectors will benefit from the renewed ties, as no concrete policies have been announced. He cautioned that any positive sentiment stemming from improved relations may be temporary unless backed by substantial policy changes.
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